College Planning 101

The dreaded Free Application for Federal Student Aid will be available October 1st of this year and should be easier to complete because you can use 2015 tax returns and not have to do any updates in the spring after filing your 2016 returns.  The following link summarizes the changes and gives some tips on obtaining the most aid possible.

http://money.cnn.com/2016/09/25/pf/college/fafsa-application-changes/   

But for those people who are new parents or still have children younger than college age there is still the daunting question of “How will I pay for college”.  As is the case with all long term goals, the earlier you start saving, the better your account balance should look over time.  This is due to the power of compounding interest.  If you start to save for college from the time your children are born, separating those accounts from all other funds, you will have at least part of the balance covered.

There are many strategies out there, most focus on some ratio of parental savings, financial aid, current income and in some cases, help from family.  It is impossible to know what a newborn child will want to do when they are 18 years old: Will they want to go to a 4 or 2 year school? Public or private?  Trade school? Travel the world?  So what are the best steps for a parent to take now?

  • Fund your retirement accounts first. Students can get loans for education, there are no “retirement loans” available at this point!
  • Save money in college savings accounts. The money will grow tax deferred and can be withdrawn tax free if used for educational purposes.  The funds can also be transferred among family members for educational purposes if necessary.
  • Save money in Roth IRA accounts in the parent’s names. Any contributions into the account can be withdrawn tax and penalty free if used for education and the account is not included in assets on the FAFSA form.   http://www.marketwatch.com/story/3-reasons-to-use-a-roth-ira-to-save-for-college-2015-03-25
  • Stress academics over athletics for scholarship purposes. Yes, there are plenty of athletes with full scholarships at the larger schools, but many more kids get grants and scholarships for academic achievement.  Volunteer hours can lead to extra money as well.

Most importantly, don’t give up hope that your child will not be able to afford college or will be saddled with huge loans. Make smart economic choices about the college they choose and discuss the finances of college with your child early in high school.

We have software available that can help you plot your course for the best possible outcome for you and your family.

Cheryl Sternasty, CFP®